GC Agenda China: July 2016 | Practical Law

GC Agenda China: July 2016 | Practical Law

A look back at the most recent legal developments for general counsel (GC) and their advisers working on China-related matters. GC Agenda China identifies and analyses the key issues that affect businesses, provides insight from leading legal practitioners and professionals, and gives specific and actionable guidance in response to these issues.

GC Agenda China: July 2016

Practical Law UK Articles 9-631-5565 (Approx. 11 pages)

GC Agenda China: July 2016

by Brad Herrold, Consultant and Practical Law China
Published on 28 Jul 2016China
A look back at the most recent legal developments for general counsel (GC) and their advisers working on China-related matters. GC Agenda China identifies and analyses the key issues that affect businesses, provides insight from leading legal practitioners and professionals, and gives specific and actionable guidance in response to these issues.

Speedread

A look back at the most recent legal developments for general counsel and their advisers working on China-related matters. GC Agenda China identifies and investigates the key issues affecting businesses, provides insight from leading practitioners and gives specific and actionable guidance in response to these issues.
This month's GC Agenda covers:
  • NPC's draft civil law principle.
  • SAIC's final version of internet advertising measures.
  • CAC's rules on internet search services.
  • CAC's rules on mobile internet applications.
  • State Council's further reform on company registration procedures.
  • SASAC's and MOF's rules on state-owned property transactions.
  • CFDA's measures on investigations involving online food safety.

NPC to amend civil law

According to an announcement on the official website of the National People's Congress (NPC) on 28 June 2016, the NPC conducted its first reading of the General Principles of the Civil Law of the People’s Republic of China (Draft Version) 2016 during the 21st meeting of the 12th session of the NPC Standing Committee in Beijing. The draft contains a number of proposed changes intended to address the changing needs of China’s rapidly developing society.
These changes include:
  • Providing civil capacity to protect the property and personal rights of a foetus, provided the foetus survives the pregnancy (Article 16).
  • Lowering the age for the limited civil capacity of minors from 10 years old to six years old (Article 19).
  • Increasing the maintenance obligations of adults to their parents with no or limited capacity for civil conduct (Article 25).
  • Strengthening the protection for adults who are unable to fully account for their own conduct (Article 21).
  • Removing employers from the scope of guardians and expanding the scope to cover other organisations (including charity organisations), subject to the consent of the local government department in charge (Article 27).
  • Improving the system for the removal of a guardian (Article 34).
  • Clarifying the issue of civil capacity of non-legal person organisations (including sole proprietorships and partnerships) (Article 91).
  • Providing increased protection for virtual property rights, including information networks and data privacy (Article 108).
  • Adding a new form of civil liability for environmental restoration (Article 160).
  • Increasing the statute of limitations from two years to three years (Article 167).

Market reaction

Thomas Y. Man, Professor, Peking University School of Transnational Law, Shenzhen

"The issuance of the draft signifies the beginning of the end of China’s long march for a comprehensive civil code that began in the 1980s. The draft introduces seeping, yet incremental changes to the current civil law principles (promulgated in 1986 as a stand-alone piece of legislation). Once adopted, it will serve as the introductory chapter of the contemplated civil code setting out the fundamental principles. The NPC intends to complete this process by 2020, culminating with the adoption of the civil code. There will be intense legislative activities over the next few years when separate chapters covering different areas of civil law are to be drafted, debated and adopted by the NPC."

Action items

While the final version of the amended civil law is years away, GC may wish to take note of the following proposed changes:
  • The classification of all legal persons into for-profit and not-for-profit organizations indicates increased legislative attention to not-for-profit organizations.
  • The clarification that non-legal person organizations (such as sole proprietorships, partnerships and branches) enjoy civil capacity signifies the growing importance of non-legal person organizations.
  • The recognition of hidden-name agent, in addition to the existing delineation of explicit and apparent agency relationships, captures the growing complexity of principal-agency relations in commercial activities.
  • The extension of the statute of limitations from two years to three years will have a sweeping impact on market participants’ psychology of legal exposure in business activities with the potential to give rise to increased use of injunctions to toll the running of the applicable statute of limitations in a given legal action.

SAIC issues internet advertising measures

On 4 July 2016, State Administration for Industry and Commerce (SAIC) issued the Interim Measures for the Administration of Internet Advertising 2016. The interim measures will take effect beginning 1 September 2016 and supplement the Advertising Law of the People's Republic of China 2015 (2015 Advertising Law).
The interim measures apply to all forms of direct or indirect commercial advertising in the form of text, image, audio, video or others through a website, webpage, internet application or other online media, including, for example, display ads, email solicitations and paid searches.
The interim measures:
  • Prohibit internet advertising in relation to goods or services that cannot be produced, distributed or advertised under Chinese law.
  • Require internet advertising, including paid search results, to be marked and easily identifiable as advertising.
  • Require "pop ups" to have an obvious close button.
  • Prohibit the inclusion of advertising or links to advertising in emails sent to recipients without their permission.
  • Impose liability on internet advertisers for inauthentic advertising content.
  • Make internet advertising operators (intermediaries) and publishers responsible for:
    • verifying the certification documents of internet advertisers;
    • examining the content of advertisements;
    • registering the name, address, contact information and other identity information of internet advertisers; and
    • maintaining and updating those records of internet advertisers.
  • Prohibit measures that restrict or impair the normal transmission of internet advertising.
For more information on the 2015 Advertising Law, see Practice note, Advertising law in China.

Market reaction

Paul McKenzie, Managing Partner, Morrison & Foerster, Beijing and Shanghai

"Promulgation of the new internet advertising rules is a significant development in the Chinese government’s effort to strengthen consumer protection in the burgeoning e-commerce market here. Advertisers, advertising intermediaries, and internet companies all need to be mindful of the requirements of these rules, particularly in light of increasingly aggressive consumers and consumer groups."

Action items

GC for any company that engages in internet advertising directly, or indirectly as an intermediary or internet content provider, should be mindful of the obligations imposed on the advertising operators (intermediaries) and publishers, and work with business colleagues to ensure the form and content of the advertisements comply with all applicable requirements.

CAC issues provisions on internet search services

The provisions apply to the delivery of internet information search services in Mainland China, that is, the use of computer technology to gather and process all kinds of information from the internet and provide indexing to users (Article 2).
The provisions require search service providers:
  • To provide objective, just and authoritative search results that do not contain subversive or obscene content or otherwise harm the national interest, public interest or the lawful rights and interests of citizens, legal persons and other organisations (Article 10).
  • To establish systems to ensure information security, including information reviews, real time inspections, data privacy protections and emergency response mechanisms sufficient to provide technical assistance to government regulators in policing the search industry (Article 6).
  • To establish a user complaints system, place it in a conspicuous location, promptly respond to complaints, and bear liability for damages to user interests (Article 12).
  • In relation to paid searches, to confirm user credentials, to clearly distinguish between paid and normal search services, and to place a conspicuous marker next to each paid search item (Article 11).
  • In relation to search results that obviously contain information, websites or applications that violate Chinese law, to stop providing search results, save the relevant records, and report to the CAC.
The provisions also require search industry organisations to self-regulate, develop industry norms, and improve the professionalism of personnel in the industry (Articles 3 and 4).

Market reaction

Jianwei (Jerry) Fang, Partner, Global Law Offices, Shanghai

"This regulation attracts great public attention against the backdrop of recent internet search incidents. It follows a recent trend by requiring search providers to provide technical support to government authorities. These obligations are similar to the legal obligations stipulated in the Anti-Terrorism Law and the second draft of the Cybersecurity Law. We expect that regulations on internet companies will be further strengthened and more rigorous obligations will be imposed on internet companies going forward."

Action items

GC for internet search service providers should be aware of these statutory obligations imposed on search service providers (in particular the requirement to distinguish between paid and normal search services) and work with business colleagues, industry associations and government representatives, to ensure compliance and develop practical industry standards.

CAC issues rules on mobile internet applications

On 28 June 2016, the CAC issued the Administrative Provisions on Internet Information Search Services 2016, which will take effect on 1 August 2016. The provisions will strengthen data privacy in China and further assist the government in policing the internet.
Under the provisions, the term "mobile internet application" (互联网应用程序) means application software obtained by pre-installation or download and used in mobile smart terminals to provide users with information services. The term "mobile internet application providers" (互联网应用程序提供者) means the owners or operators of mobile internet applications that provide information services.
The provisions require mobile internet application providers to:
  • Verify the identity and contact information of mobile internet application users.
  • Adhere to the principles of legality, propriety and necessity and obtain the user’s consent when collecting and processing personal data.
  • Punish those publishing content in violation of Chinese law.
  • Report content violations to the relevant government agencies.
  • Refrain from accessing the location, address book, camera, audio recording or other functions unrelated to the application without the user’s consent.
  • Record user logs and keep them for at least 60 days.
The provisions also impose similar obligations on internet application stores (互联网应用商店), which are platforms using the internet to provide browse, search and download services, or development tools and product release services.

Market reaction

Sijia Liu, Associate, Global Law Office, Shanghai

"In addition to certain obligations imposed upon mobile internet application providers and internet application stores, the provisions also demonstrate the CAC’s intention to unify the administrative practice regarding business conducted on mobile apps. Under the current regime, different local authorities in charge of cyberspace related industries may apply different standards and rules on mobile apps. This is partly because that the current regime does not distinguish mobile apps from desktop apps. The provisions may result in requiring some enterprises that engage in mobile apps businesses to apply for an ICP license."

Action items

GC for any company engaged in the mobile apps industry may need to identify any new licensing requirements and opportunities presented by the new rules. In addition, counsel should educate business colleagues on the impact of the new rules and work with them to develop systems and mechanisms to ensure compliance.

State Council further reforms company registration procedures

On 30 June 2016, the State Council issued the Notice on Accelerating the Promotion of the "Five in One, One Licence and One Code" Registration System Reform (关于加快推进"五证合一、一照一码"登记制度改革的通知).
This development follows a prior reform ("Three in One") initiated by the SAIC in August 2015. That initial step combined some of the registration certificates that a business, including a foreign invested enterprise, must obtain to lawfully operate in China. The "Three in One" combination affects a company’s business licence, organisation code certificate and tax registration certificate.
According to the notice, from 1 October 2016 the "Three in One" business registration system will be converted to a "Five in One" registration system by also combining the social insurance registration certificate and statistics registration certificate.
Companies already registered under the "Three in One” system are not required to re-apply under the new system. The relevant government agencies will upload their information to the SAIC’s company information disclosure system. After the "Five in One" system takes effect, companies are no longer required to present their social insurance registration certificate and statistics registration certificate to relevant government agencies as originally required for handling certain related matters. Instead, the business licence will be the only document required.
For more information on the "Three in One" business registration system, see Legal update, SAIC pushes through company registration reform on "three in one" business licence.
For more information on the company information disclosure system, see Practice note, Understanding the 2013 Company Law reforms: China.

Market reaction

Phil Cheng, Partner, Hogan Lovells, Shanghai

"This further consolidation of the business registration system represents another step in the State Council’s effort to improve inter-departmental information sharing and reduce bureaucratic inefficiencies. We anticipate further consolidation in the future."

Action items

GC for any operating company in China should ensure that all staff in charge of company licenses are familiar with the move to the "Five In One" business licence and the resulting changes in company registration (and registration amendment) procedures.

SASAC and MOF issue detailed rules on state owned property transactions

On 24 June 2016, the State Asset Supervision and Administration Commission (SASAC) and the Ministry of Finance (MOF) jointly issued the Measures on the Supervision and Administration of Enterprise State-owned Assets Transactions (企业国有资产交易监督管理办法), with immediate effect. The measures aim to facilitate strategic adjustments to China’s economy and prevent the loss of state-owned property rights and interests.
The measures apply to the following three types of state-owned asset (SOA) transactions:
  • Transfers of all forms of equity interests in state-owned enterprises (SOEs).
  • Capital increases in an SOE, except for capital increases by government investment.
  • Transfers of important assets of SOEs.
(Article 3.)
In each case, the measures apply not only to enterprises that are purely state-owned, but also to enterprises with a state-owned controlling share and enterprises with actual state owned control (Article 4).
The measures essentially provide implementing rules on SOA transactions including:
  • Requirements to obtain SASAC approval for SOA transactions.
  • Requirements to publicly disclose specific information on the transaction, and the limited circumstances where SOAs transactions may be conducted without public disclosure.
  • Obligations to obtain audits of the target and appraisals of SOAs by qualified firms.
  • Requirements on the price of a proposed SOA transaction.
  • Limitations on the right to determine the qualifications criteria for potential buyers.
  • Processes for evaluating potential buyers who have expressed an interest in SOAs.
  • Obligations on SASAC and China’s state-owned property rights exchanges, that is, the institutions authorised to conduct state-owned property rights transactions.
  • Methods for conducting an SOA transaction, that is, through public sale, competitive bidding, online auction or other auction method.
  • Requirements on payments by the buyer of SOAs.
For more information on the transfer of SOAs, see Practice note, Transfer of state-owned assets: China.
For more information on the valuation of SOAs, see Practice note, Valuation of state-owned assets: China.

Market reaction

Liang Xu, Partner, Hogan Lovells, Beijing

"These rules have been issued in the background of a new round of SOE reform with the purpose of spinning off excess low-efficient production capacity (such as in the steel industry) and improving the competitiveness of SOEs through mergers and acquisitions or restructuring transactions, which may involve market players from the private sector as well as international investors. These rules provide more detailed guidance than the laws in the past on the special procedures for transferring equity or major assets of SOEs and notably also the issuance of new shares by SOEs to new investors."

Action items

GC should carefully review the measures in relation to any joint venture or acquisition involving an SOE, particularly with regard to identifying the SOE’s decision makers and internal approval procedures, drafting valid conditions precedent to closing, and understanding the impact the new (as well as prior rules) have on the overall timeline for the transaction.

CFDA issues measures on investigations involving online food safety

On 13 July 2016, the China Food and Drug Administration (CFDA) issued the Measures for the Investigation and Handling of Illegalities of Online Food Safety 2016, which will take effect on 1 October 2016.
The measures apply to the investigation and disposition of illegal activities of:
  • Third party online platform providers that engage in online food transactions in Mainland China.
  • Food manufacturers and distributors that distribute food online through their own website or through a third party online platform.
The measures require third party online platform providers to:
  • Record-file with, and obtain a filing number from, the municipal or county level subordinate of the CFDA.
  • Verify the business licence, food production licence and operating permit of online food manufacturers and distributors.
  • Establish administrative systems for:
    • fielding consumer complaints;
    • registering online food manufacturers and distributors;
    • archiving online food transactions; and
    • inspecting food products sold on the online platform.
  • Cease online food transactions where they discover a violation of food safety rules.
The measures require online food manufacturers and distributors to:
  • Obtain mandatory food production and distribution licences, and prominently display them on the home page of their website.
  • Record-file with, and obtain a filing number from, the municipal or county level subordinate of the CFDA.
In addition to the food production and distribution licences, online food manufacturers and distributors selling health foods, foods for special medical purposes (FSMPs) and infant formula distributed through an online platform, must also display their product registration certificate or filing record, advertising approval number (if any), and link to the data search page of the CFDA website. One category of FSMPs (that is, nutritionally complete foods with a specific formulation) must not be distributed online. All health foods must carry a warning stating "not a substitute for medicine".

Market reaction

Chen Bing, Partner, King & Wood Mallesons, Shanghai

"The measures are a new implementing regulation introduced by the CFDA following the new Food Safety Law, which was issued in 2015. The measures impose compliance obligations on food manufacturers and operators who participate in online food trade, in addition to providing detailed procedures for administrative investigations on unlawful activities relating to online food sales, including jurisdiction, investigation steps and penalties. The measures also specify obligations, such as information disclosure, orders to cooperate with the CFDA, and for the first time record-filing with the local FDA, of online platforms including both third party online platforms like Taobao and those set up and owned by the brands. As an important complement to the existing legal system, the measures will have a material impact on standardising on-line food trade activities."

Action items

GC for food manufacturers and distributors that engage in online trade should work with business colleagues to ensure compliance with the information disclosure obligations and the licensing and record-filing requirements. Likewise, counsel for online platform providers should take steps to ensure their clients adhere to the compliance obligations under the measures, including record-filing and the establishment of administrative systems, as well as their obligations to cooperate with government investigations.